Bob’s Journal for 9/14

With Tech Stock Investing, Timing is Crucial

Sometimes a technology company is a great long-term business, but its stock is a bad investment.

Investors need to be careful about when they buy stocks of the great tech companies, according to a recent report from Research Affiliates.

Last week, I discussed how Nvidia (NVDA) has been the top-returning stock for the last 10 years and a top stock since 1999. But its returns have been quite volatile, and many investors have lost money on the stock.

The Research Affiliates report states that at times stocks of great technology companies sell at bubble prices. Investors who buy at the bubble levels can lose money on the stocks while being right about the long-term prospects of the companies.

The report looks back at the technology stock boom and bubble that peaked in 2000 and its aftermath.

Investors and forecasters were correct that the internet would change the ways we communicate and do business. But the stocks were ahead of reality, forming what two researchers dubbed a “big market delusion.”

Of the 10 most valuable tech stocks at the peak of the dot-com bubble, none beat the market indexes from the dot-com bubble peak to the next market peak in 2007.

Also, from the bubble peak through to the end of 2022, of those 10 stocks, only Microsoft (MSFT) returned more than the market indexes. MSFT underperformed during most of the period and only surged ahead of the benchmarks after replacing senior management in 2014.

An investor who purchased the 10 largest tech stocks in 2000, weighting them by their relative market capitalizations and held them through the end of 2022 would have earned 29% less than an index investor.

Neither Apple nor Amazon was on the top 10 list in 2000, because neither was among the 10 largest tech companies during the dot-com bubble.

The poor stock returns of the top 10 technology stocks from 2000 onward weren’t due to poor performance by most of the companies. Excellent business results were turned in by many of the companies, such as Cisco, Qualcomm, Intel and more (though there were disappointments, such as America Online).

The report has additional insights about tech stock performance after 2000 and is worth reading.

The main point of the report and the reason it was issued now is that Research Affiliates believes we might be at a similar point.

The stock indexes have been driven higher in 2023 largely because of excitement about artificial intelligence. A few AI-related stocks, such as Nvidia, are dominating the indexes.

While AI might revolutionize society the way the tech developments of the dot-com era did, investors might not benefit from buying Nvidia and other AI stocks today. The stocks likely are trading at bubble levels. This probably is another “big market delusion.”

Cost of Medicare Increases Less Than Expected

Medicare spending hasn’t grown as fast as forecast a decade ago. That saved taxpayers money and delayed the urgency of changing the system.

Spending on Medicare over the last 12 years increased about $3.9 trillion less than federal budget officials forecast at the start of the period.

Put another way, spending on Medicare increased an average of a little over 3% per year since 2009, and that’s despite a large increase in the number of its beneficiaries due to the aging of the Baby Boomers, according to a report from the Kaiser Family Foundation. Medicare spending had been projected to grow at a much higher rate.

Another way to look at the numbers is that per capita Medicare spending grew more slowly than per capita gross domestic product (GDP) during the same period.

Many reasons are given for the unexpected change in spending growth, and there’s no agreement on the main drivers.

Some attribute the decline to payment changes made in the Affordable Care Act (Obamacare). The legislation reduced payments to medical providers and created incentive programs, such as penalizing hospitals when patients are re-admitted too quickly after being discharged.

Other analysts point out that private insurers, including those offering Medicare Advantage plans, changed the ways they pay for care.

There also has been an increase in access to and payments for preventive care, including before people are eligible for Medicare. Spending on preventive care can reduce future major medical costs.

Some analysts point out that the flood of the early Baby Boomers into Medicare beginning in 2011 gave the program a younger average age, which usually means less medical spending per person. That mix of ages in the program explains some of the lower spending. But if that’s the case, Medicare per capita spending will increase as the Boomers age.

A major factor could be the combination of innovative prescription drugs plus the Medicare prescription drug program that encourages more people to take medications. For example, some studies say Medicare is spending less on heart-related conditions because of the widespread use of effective anti-cholesterol and blood pressure medications.

Whatever the reasons that Medicare is spending less than projected, they don’t amount to Medicare spending less money. It is only spending less than officials thought it would.

Medical spending was 10% of federal spending in 2021 and still is expected to increase to 18% of spending by 2032. The Medicare Part A trust fund still is expected to run out of money in a few years.

Medical spending will continue to take more and more of the federal budget. That will increase pressure to boost taxes and reduce Medicare benefits.

A Digital Dollar Isn’t Imminent

The Federal Reserve doesn’t have a plan to issue a digital dollar, also known as a central bank digital currency (CBDC), according to Fed Vice Chairman Michael S. Barr.

I know many of you have seen a steady stream of emails, ads and web pages from various people stating that the Fed is on the verge of issuing a digital dollar. These communications list what the authors say are many negative effects that will come from a CBDC.

As I’ve pointed out before, and as Barr reiterates, we’re a long way from a digital currency in the United States. The Fed and the U.S. Treasury have been studying the potential for a CBDC and regularly issue reports updating the results of their studies.

The Fed and Treasury are conducting an overall review and examination of technologies that affect the U.S. payments system and banking system. Other factors being studied include crypto assets, distributed ledger technology (also known as blockchain technology), and technology-driven partnerships between banks and non-bank financial technology companies.

The Fed hasn’t made a decision on issuing a CBDC and won’t do so without clear support from the executive branch and authorizing legislation from Congress, according to Barr.

The Fed’s more immediate concerns are the digital assets known as stablecoins. Stablecoin issuers peg their digital tokens to existing currencies and usually say each stablecoin is backed by the existing currency.

The Fed wants to establish federal oversight to ensure stablecoins don’t threaten the stability of the financial or payment system.

The Data

The Consumer Price Index (CPI) increased 0.6% in August, following a 0.2% increase in July.

The 12-month increase in the CPI increased to 3.7% through August after being 3.2% through July. The 12-month CPI has increased for two consecutive months after declining for 10 months in a row.

Gasoline prices were a major cause of the CPI’s increase. The core CPI, after subtracting food and energy, increased 0.3% in August after rising 0.2% in July.

Over 12 months, the core CPI is up 4.3% through July after being up 4.7% through June. The 12-month increase in the core CPI is the lowest since September 2021.

Consumer credit outstanding increased 2.5% in July after increasing 3.4% in June.

Revolving credit (mostly credit cards) increased at a 9.2% annualized rate in July, after declining 0.8% in June. Nonrevolving credit (mostly student and vehicle loans) rose 0.2% in July after increasing 4.3% in June.

Optimism among small business owners declined a little in August, according to the Small Business Optimism Index from the National Federation of Independent Business (NFIB).

The index fell to 91.3 in August from 91.9 in July. Inflation was more of a concern in August, with the percentage of small business owners saying it was their most important business problem rising two points to 23%.

The number of owners expecting business conditions to improve over the next six months declined seven percentage points from July to August.

Business productivity increased 3.5% in the second quarter, according to the final estimate. That’s an improvement from a 1.2% decline in the first quarter.

Hourly compensation increased 5.7% in the final estimate for the second quarter.

The combination of higher productivity and higher compensation resulted in a 2.2% annualized increase in unit labor costs in the second quarter. That’s less than the 3.9% increase in the first quarter.

New unemployment claims declined by 13,000 to 216,000 in the latest week. That’s the lowest level since February.

Continuing claims, which lag a week behind new claims, decreased to 1.679 million from 1.719 million.

The Markets

The S&P 500 lost 0.72% for the week ended with Tuesday’s close. The Dow Jones Industrial Average gained 0.07%. The Russell 2000 fell 1.42%. The All-Country World Index (excluding U.S. stocks) declined 0.33%. Emerging market equities retreated 0.61%.

Long-term treasuries rose 0.76% for the week. Investment-grade bonds increased 0.20%. Treasury Inflation-Protected Securities (TIPS) added 0.39%. High-yield bonds gained 0.07%.

The dollar rose 0.07%.

Energy-based commodities increased 1.72%. Broader-based commodities rose 0.24%. Gold declined 0.69%.

Bob’s News & Updates

My latest book is “Retirement Watch: The Essential Guide to Retiring in the 2020s.” Learn more and order by clicking here and here. You can be among the first to write a review.

My previous book, “Where’s My Money: Secrets to Getting the Most out of Your Social Security,” is receiving mostly five-star reviews on Amazon for telling you clearly what your benefit options are in different situations and how to determine the best choice for you. You can find it on amazon.com or Regnery.com.

The number of regular viewers for my Retirement Watch Spotlight Series continues to increase. You should sign up because I make in-depth presentations of key retirement finance topics. You can watch these online seminars from the comfort of your home or office at times you choose. To learn more about my new Spotlight Series, click here.

A recent five-star review of my book, “The New Rules of Retirement” on amazon.com said, “A complete retirement guide! One of the best books on this topic!” Click for more details about the revised edition of “The New Rules of Retirement.”

If you’re interested in my books, check my amazon.com author’s page.

I’m a senior contributor to the Forbes.com blog. You can view my contributor page here.

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